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244161_JLL_HotelTopics 25/5/05 4:43 PM Page 1

June 2005

Global Management Agreement Trends

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HILTON HOTELS & RESORTS 6 EXPRESS QUALITY INNS, HOTELS & SUITES REGENCY GOLDEN

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INTERNATIONAL RED LION INNS SUMMER SUITES DEVERE HOTELS GLORIA PLAZA HOTELS, INNS & RESORTS MANDARIN/MERITUS

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COUNTRY HEARTH INN PENINSULA HOTELS EXEL INNS, EXEL HOTEL HOTEL DES GOUVERNEUR IMPERIAL HOTELS VAGABOND INNS NUIT D' HOTEL PRINCIPAL COAST

HOTELS & RESORTS WELLESLEY INN LONDON SIGNATURE LOTTE PARK LANE SUNWING (AIRTOURS) LUCIEN BARRIERE TREASURE ISLAND OTHON HOTELS SIVA

(AIRTOURS) BERJAYA HOTELS & RESORTS ALLEGRO RESORTS MARCO POLO MAINSTAY SUITES PRIMADONNA HOTELS PROTEA HOTELS PREMIER AMARI HOTELS &

RESORTS OTAKA HOTELS ORIENT EXPRESS RIO HOTEL TULIP INN WELCOMGROUP SOL INNS FURAMA HOTELS TRADERS PLAZA LA GLORIAS QUEENS MOAT DEDEMAN

HOTELS PARK PLAZAIN CONJUNCTION INTERNATIONAL WITHCENTRAL: HOTELS & RESORTS SANDALS RESORTS GOLDEN NUGGET DANUBIUS HELMSLEY HOTELS CARLTON HOTELS CONTINENTAL PLAZA DORAL HOTELS GRAN MELIA CONCORDE HOTELS HELNAN HOTELS BREEZES DOLCE INTERNATIONAL MANHATTAN EAST SUITES BAYVIEW HOTELS

VILA GALE HOTELS CORUS ROYAL PRINCESS HOTELS FAMILY INNS OF AMERICA SEDONA KRASNAPOLSY WOODFIN/CHASE BRISTOL/HARVEY TULIP INN BEST

WESTERN HOLIDAY INN DAYS INN MARRIOTT HOTELS, RESORTS AND SUITES COMFORT INNS & SUITES RAMADA SHERATON HOTELS SUPER 8 HAMPTON INN HILTON

HOTELS RADISSON HOTELS & RESORTS QUALITY INNS, HOTELS & SUITES HYATT REGENCY COURTYARD BY MARRIOTT GOLDEN TULIP

MERCURE TRAVELODGE HILTON INTERNATIONAL IBIS HOWARD JOHNSON NOVOTEL WESTIN DOUBLETREE HOTELS ECONO LODGE RIU HOTELS CROWNE PLAZA

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HOTELS OKURA HOTELS JARVIS HOTELS STEIGENBERGER LOEWS JOLLY HOTELS SWISSOTEL TOKYU HOTELS PAN PACIFIC HOTELS ROBINSON CLUB FORUM MERCURE 244161_JLL_HotelTopics 25/5/05 4:43 PM Page 2

Global Hotel Management Agreement Trends

FOREWORD INDEX

Welcome to Jones Lang LaSalle Hotels’ 2005 global review of Global Management Agreement Trends 1 recently negotiated hotel management agreements. This edition of FocusOn represents an update of the global survey conducted in 2001. Americas Management Agreements 2

The results presented here are based on an analysis of over 80 hotel Asia Pacific Management Agreements 6 management agreements negotiated over the past four years across Asia Pacific, and the Americas. European Management Agreements 10 Given the prevalence of lease arrangements in the European hotel market, this year we have also included a separate analysis of the European Lease Agreements 15 trends in leases in France,,Italy,Spain,Switzerland and the UK.

At the outset we would like to give a word of warning. This survey identifies general trends based on the sample group of agreements. It would therefore be inappropriate to apply these trends (and in particular any averages) to a specific management agreement under negotiation.

We trust you find this research interesting and informative and as always, we welcome your feedback.

Arthur de Haast Global CEO Jones Lang LaSalle Hotels

Graeme Dickson Partner Baker & McKenzie

Daniel Braham Director - Hotels Group CMS Cameron McKenna LLP 244161_JLL_HotelTopics 25/5/05 4:43 PM Page 1

Global Hotel Management Agreement Trends

Welcome to Jones Lang LaSalle Hotels’ 2005 global review of recently negotiated hotel management agreements. As opposed to the previous survey conducted in 2001, which revealed a significant swing in power to the owner, this survey, which was conducted in conjunction with Baker & McKenzie and CMS Cameron McKenna LLP, reveals only minor global changes have occurred over the past four years. This is because the key commercial terms of hotel management agreements have moved as far as possible in favour of the owner.

GLOBAL MANAGEMENT AGREEMENT TRENDS Performance clauses are common in the Americas and Europe and are becoming increasingly popular in Asia Pacific. These clauses Over the past four years, the length of management agreement may, for instance, require that the hotel achieve 80% of budgeted terms has become more uniform as international operators spread GOP or at least 90% of the competitive sets’ RevPAR. their influence across the globe. Average European initial terms have declined from 19 years in 2001 to 15 years in 2005,while at the While gaining in popularity in Europe and Asia Pacific, operator other end of the scale, average initial term lengths for American guarantees are not found in the Americas. In the US, incentive fees agreements have increased from 10 to 13 years. Average Asia are considered sufficient to apportion risk to the operator. Pacific initial terms have remained consistent at 12 years. All regions have an increasing propensity to include FF&E Across the board, the most common renewal options are one or Reserves in their agreements to set aside funds for ongoing capital two options of 5 years. expenditure requirements. It is now considered the norm to have such a Reserve. American agreements tend to specify a higher Renewal options are less prevalent in European agreements than in Reserve, with the average stabilised fee being 4.4% of Gross the agreements of other regions, allowing European owners Revenue. The corresponding measures for Europe and Asia Pacific increasing flexibility to change operators after the initial term are 3.9% and 3.1% respectively. has elapsed. % Agreements with Specified FF&E Reserve Average % Agreements Most Common Initial Term with Options Option Term Americas 100.0%

Americas 13 92.0% 1 or 2 options Asia Pacific 96.4% of 5 yrs Europe 96.6% Asia Pacific 12 75.0% 2 options of 5 yrs Across all regions, agreements allowing termination without cause Europe 15 48.3% 1 option are increasingly rare. However, in Europe and Asia Pacific, owners of 5 yrs are recognising the value of a vacant possession clause, and termination on sale is available in the majority of cases.

While average base fees have remained largely unchanged in % Agreements with American and Asia Pacific agreements over the past four years, Termination % Agreements with they have increased slightly from 1.8% to 2.2% in European Without Cause Termination on Sale agreements. Americas 9.0% 32.0% Of all three regions,Asia Pacific management agreements have the Asia Pacific 25.0% 82.1% lowest base fees, with most falling between 2-2.9%. The most common base fee in the Americas is 3.0% and the majority of base Europe 17.2% 55.2% fees in Europe are 3-3.9%. On the whole, base fees are relatively similar across the globe.

In contrast, incentive fees vary significantly between individual contracts and between regions. In fact, they vary so much that inter-regional analysis is meaningless.

Average Base Fee (% Gross Revenue) 2005 2001 Survey Survey Americas 2.8% 2.7% Asia Pacific 1.4% 1.5% Europe 2.2% 1.8%

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Global Hotel Management Agreement Trends

AMERICAN MANAGEMENT AGREEMENTS Extension by consensus is the most common feature with 50.0% of the contracts requiring the approval of both parties. The second Our Americas survey covered 25 recently negotiated management most common characteristic, at 31.8%, is that of having the agreements spanning 112 hotels with 31,000 rooms, the vast contracts extended if the operator has met all performance tests. majority of which were in the US. This is illustrated in the table below.

1. Term Who Can Exercise the Option % of Agreements Although the average term across all contracts is 13 years, the 2005 2001 responses fell into two distinct camps.Branded operators report an Survey Survey average contract length of 18 years and independent operators, Operator only 9.1% 26.1% managing with a franchise or without benefit of a flag, report an average term of seven years.Term lengths appear to have increased Owner only 9.1% 4.3% slightly since our last survey, when the average term was 10 years. Mutual 50.0% 69.6% Automatic 31.8% 0.0% Initial Term – Americas

4.0% 3. Base Fees 12.0% A typical contract in the Americas has reverted to a flat base fee. Only 16.0% of the contracts surveyed allow for the ramping-up of fees and these tend to be for new construction.Taking into account 28.0% 16.0% only the stabilised fee level for escalating fee structures,the average base fee for all contract types is 2.8% of Gross Revenue which is similar to the result of the 2001 survey. The average base fee for independent operators is 2.6%, while branded operators demand a higher fee at 3.0% of Gross Revenue. 16.7%

32.0% There is an inverse correlation between hotel size and base fees – the larger the hotel, the lower the base fee. This relationship holds 20-29 years 30-39 years 10-14 years true for portfolios as well. Presented below is a graph of the distribution of base fees. 15-19 years 0-4 years 5-9 years Base Fee (% Gross Revenue) – Americas Source: Jones Lang LaSalle Hotels 8.0% 2. Option Period / Renewal Terms 20.0% As revealed in the last survey, the vast majority (92.0%) of American management agreements contain renewal options. The most common renewal terms are either two options of five years or one option of five years.

Following the same pattern as found in the initial term,the average 44.0% 20.0% option period of branded operators is nine years, while independent operators’ average renewal term is four years. 8.0% Term Renewals – Americas 2.0% 2.5% 2.8% 16.7% 16.7% 3.0% 4.0%

Source: Jones Lang LaSalle Hotels 8.3%

16.7%

16.7%

25.0%

Nil Multiple Multiple of 1 year of 3 years Multiple Multiple Multiple of 5 years of 10 years of 20 years

Source: Jones Lang LaSalle Hotels

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Global Hotel Management Agreement Trends

4. Incentive Fees 7. Performance American agreements exhibit a significant departure from the Performance clauses which specify that a contract may be more straightforward global standard of structuring incentive fees terminated if an operator fails to meet the prescribed performance as a percentage of Gross Operating Profit (GOP). By far the most tests, are very typical in American hotel management agreements. common arrangement is to structure incentive fees on Net Generally there are two tests and an operator must fail both of Operating Profit (NOP), after the payout of an Owner’s Priority them. Less frequently, an operator may be terminated for failing Return. The metric for Owner’s Priority Return varies, as do one test only, or two of three tests. definitions for Net Operating Profit, but the American contracts clearly recognised the burden of the acquisition or cost basis. When the tests involve negative variances from budgeted NOP or an owner’s return, operators are generally given an opportunity to Incentive Fee – Americas cure. However, the opportunities to cure are generally limited in number or in frequency. For example, the Operator is not allowed 12 to cure a shortfall in three consecutive years.

10 Performance tests are less frequent among independent operators, with their shorter contract lengths and more difficult early 8 termination options.Presented below is a table of the performance 6 test for branded operators for which they are uniformly required. The most popular test is a RevPAR performance test, in which the 4 subject hotel must achieve at least 90% of its defined competitive set. Other performance tests are detailed in the following table.

Number of Agreements 2

0 Performance Tests for Branded Operators % of Agreements Nil 4% 5% 10% 15% NOP Other RevPAR 92.9% %GOP A percentage of the Budgeted NOP 57.1% Source: Jones Lang LaSalle Hotels Owner’s Priority return expressed as a % or in dollars 57.1%

Of the contracts with incentives structured to allow for an Owner’s 8. Budget Priority Return, the majority allow for the return to be calculated on total project or acquisition cost versus the investor’s actual a) Annual Budget equity. The most common and average owner preferred return is 10%. The most common incentive fee in such a structure is 20% With very few exceptions, owners have the right to approve the after the owner’s priority payout. annual operating budget.All contracts with independent operators allow the owner to approve the annual operating budget. Among Only 31.8% of the contracts featured capped incentive fees. branded operators, the ratio is slightly lower, but still an overwhelming 85.7%. 5. Other Fees & Charges b) Capital Budgets Again there is a considerable variety in the American agreements in relation to head office expenses including sales and marketing. Ratios for owner approval of capital expenditure budgets are As with the term length and fees, independent operators do not identical to those for the operating budget pass on as many corporate charges as branded operators. c) Budget Dispute Resolution Reflecting the recent lawsuits regarding compulsory buying through operator-owner purchasing companies, approximately As can be seen from the following table, arbitration is the most one-third of the contracts allow for optional use of operator common form of dispute resolution in American management subsidiary companies for either the purchasing of supplies or the agreements. This is in contrast to the other regions where purchasing of FF&E. independent experts are used more frequently.

6. Operator Guarantee Method % of Agreements This is the area in which contracts in the Americas differ most 2005 2001 distinctly from the contracts in Europe and Asia Pacific. There are Survey Survey no operator guarantees in any of the contracts we surveyed.Having Arbitration 72.0% 38.5% structured incentive fees to reflect a portion of the owner’s risk,the Independent Expert 8.0% 0.0% prospect of a guarantee is not likely. Private Negotiation 0.0% 50.0% Arbitration or Court 4.0% 0.0% Arbitration or Expert 4.0% 0.0% Prior Year’s Budget 0.0% 7.7% No mechanism / Silent 12.0% 3.8% 3 244161_JLL_HotelTopics 25/5/05 4:43 PM Page 4

Global Hotel Management Agreement Trends

9. Restrictions on Operator FF&E Reserve (% of Gross Revenue) – Americas

a) Appointment of Key Personnel 7

All contracts surveyed in the Americas provide owners with the 6 right to approve the General Manager, either specifically or as part of their right to approve the entire Executive Committee. Over half 5 (56.0%) of all contracts surveyed give this “full spectrum” right to 4 the owner. The other two positions for which an owner is allowed approval rights are the Director of Sales/Marketing and the 3 Financial Controller. 2 Number of Agreements Number of Approval % of Agreements 1 2005 2001 0 Survey Survey 3% 4% 5% 1-5% 2-4% 2-5% 3-5% Owner consent required 100.0% 48.1% 4-6% % of Gross Revenue Owner permitted to comment 0.0% 22.2% No approval required 0.0% 29.6% Source: Jones Lang LaSalle Hotels

b) Restrictions on Contracts and Leases

The majority of American contracts (62.5%) afford the owner approval rights of any leases over a stipulated length. Of these, most set the limit as one year. This review right is found in 81.8% of agreements with independent management, but is present in only 46.2% of the branded operators’ agreements.

Restrictions on Operator’s Contracting and Leasing % of Agreements

Monetary limit and/or contract restrictions 62.5% No approval required 37.5%

c) Approval of Major Disbursements

Almost a quarter (70.8%) of American agreements provide the owner with signature rights for any disbursement over a stipulated amount. There is less of a divergence between the results for branded and independent operators on the disbursement issue. 72.7% of agreements with independent operators and 69.2% of the agreements with branded operators required owner authorisation on disbursements over a specified amount.

10. Capital Expenditure All contracts require that the owner establish an FF&E Reserve. 40.0% of agreements allow for an escalating structure that, within three to five years, ramp up to a stabilised percentage. The average stabilised year percentage, for both branded and independent operators is 4.4% of Gross Revenue. This has increased from the 4.0% revealed in our 2001 survey.

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Global Hotel Management Agreement Trends

11. Termination 12. Non-Compete Not surprisingly, there are significant differences in termination Most relevant among branded operators, the proportion of total features between branded and independent operators. The only American agreements containing non-compete clauses is 20.0%. agreements that are silent on termination or prohibit it are for branded operators and the only agreements that allow for Restriction % of Agreements termination “without cause” at any time during the initial term involve independent operators. Over half of the agreements 2005 2001 Survey Survey involving independent operators allow for termination on sale at any time during the contract, whereas branded operators do not Geographical restriction for initial 1 – 5 yrs 8.0% 10.7% allow termination on sale until the latter years of the contract. Geographical restriction for 15 yrs 4.0% 3.6% Geographical restriction for term of contract 8.0% 32.1% Presented below is a summary of the termination provisions. No geographical restriction 80.0% 53.6%

Early Termination Issue % Agreements 13. Dispute Resolution Agreement is Silent 3.2% The majority of agreements for the Americas now prescribe Specifically Prohibited 12.9% alternative dispute resolution, which is a marked change from our 2001 survey when only 17.9% called for arbitration and 21.4% On Sale at any Time 22.6% called for arbitration before court proceedings. On Sale in Latter Years 25.8% In Bankruptcy 12.9% None of the agreements surveyed cited court proceedings as a first Without Cause at any Time 9.7% or second option but 12.0% are silent on the matter, leaving that as a clear option. Without Cause in latter Years 12.9%

Form of Resolution % of Agreements The highest early termination penalties reported are for branded operators. For these operators, the penalty half way through the 2005 2001 term is three times the combined base and incentive fees for the Survey Survey prior year. For independent operators, the highest penalty occurs Independent Expert 12.0% 0.0% half way through the term and is calculated at two times the prior Arbitration 84.0% 17.9% years’ base and incentive fees. For both operators, the penalty fees Independent Expert and Court 0.0% 3.6% decline in the latter years of the initial term. Independent Expert,Arbitration and/or Court 0.0% 21.4%

Termination Clauses – Americas Court 4.0% 57.1%

100 %

80 %

60 %

40 %

20 %

0 % Termination Without Cause Termination On Sale

No termination right Termination available

Source: Jones Lang LaSalle Hotels

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Global Hotel Management Agreement Trends

ASIA PACIFIC MANAGEMENT AGREEMENTS Term Renewals – Asia Pacific 14.3% 14.3% Written in conjunction with Baker & McKenzie

Our survey reviewed 28 recently negotiated hotel management agreements covering 9,176 rooms across eight countries.

21.4% 1. Term Analysis of recently negotiated management agreements reveals that the average initial term is 12 years with the most common 42.9% term being 10 years.Although these results are consistent with the 7.1% previous survey conducted in 2001, there is significantly less variance amongst the most recent sample. The vast majority Nil Multiple of Multiple of (67.9%) of agreements have an initial term of 10 years. 5 years 5 and 7 years Multiple of Not specified As found in the previous survey,operators tend to negotiate longer 10 years initial terms for 5 star hotels than 3 to 4.5 star assets. Source: Jones Lang LaSalle Hotels; Baker & McKenzie Initial Term – Asia Pacific Of the agreements that contain option periods, most are 3.6% 3.6% 7.1% exercisable by both or either parties. Interestingly, four years ago 7.1% the operator could exercise the renewal option in almost half the agreements. Now, only 5.0% of options are in favour of the operator, while 15.0% are in favour of the owner.

Of the management fees that contain specified renewal options, the breakdown as to which party can exercise the option is given in the table below.

78.6% Who Can Exercise the Option % of Agreements Survey Survey 5-9 yrs 10-14 yrs 15-19 yrs 2005 2001 20-29 yrs 30-49 yrs Operator only 5.0% 41.7% Owner only 15.0% 11.1% Source: Jones Lang LaSalle Hotels; Baker & McKenzie Either 5.0% 36.1% Mutual 50.0% 11.1% 2. Option Period / Renewal Terms Automatic 25.0% 0.0% Option periods are offered in 75.0% of Asia Pacific’s management agreements, which is down from the 80.0% witnessed four 3. Base Fee years ago. Base fees remain predominantly a fixed percentage of Gross The most common renewal period is two options of five years Revenue which remains consistent throughout the term of the which is consistent with the previous survey. The next most agreement. However, there are some interesting variations such as: common options are one term of five years and one term of • Percentage increases as term progresses; 10 years. • Base fee is capped at a maximum in terms of percentage of As revealed in the 2001 survey, of those agreements with options, GOP; and the majority are options for multiple renewal periods. • A minimum base fee in terms of percentage of GOP is set.

Average base fees have declined slightly from 1.5% in 2001 to 1.4% in the 2005 survey. We have noticed a trend towards agreements with no base fee, since 2003. These agreements generally provide for a higher incentive fee in the range of 5-15% GOP.

In general, agreements for 3 star hotels tend to have higher base fees than the contracts for their upper tier counterparts.

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Global Hotel Management Agreement Trends

Base Fee (% Gross Revenue) – Asia Pacific 5. Other Fees and Charges 7.1% Other fees and charges vary significantly among the sample of 17.9% management agreements. However, the majority of agreements 10.7% specify a contribution for head office expenses incurred for sales and marketing, reservations and loyalty programs. 7.1% In 50.0% of the Asia Pacific management agreements, the owner must pay the operator a percentage of Room Revenue for sales and marketing services. These range from 0.5% to 4.0% with the most 17.9% popular being 2.0%. In fewer cases, this fee is calculated as a 39.3% percentage of Gross Revenue, the most common being 1.0% or 1.2%. In two cases where the fee is based on gross revenue, this payment covers reservation charges and loyalty programs in Nil less than 1% 1-1.9% addition to sales and marketing.

2-2.9% 3-3.9% Scaled Other agreements specify a fixed fee, a fixed fee plus a percentage of room revenue, a percentage of GOP or a proportion of the Source: Jones Lang LaSalle Hotels; Baker & McKenzie budgeted Sales and Marketing line expense.

4. Incentive Fee Compared to the previous survey, more agreements calculate the Incentive fees are generally calculated as a percentage of GOP or fee based on Room Revenue rather than Gross Revenue, perhaps adjusted GOP and in many cases, include a sliding scale which indicative of the growing diversity in hotels’ income streams. This depends on the level of GOP achieved.This allows the operator and shift should heighten owners’ focus on revenue allocations where owner to share in the upside of the hotels’performance.Our survey packages are sold. reveals that 46.4% of agreements include a sliding scale incentive fee. Reservation charges are calculated in a myriad of ways, the most common of which are a fixed fee per materialised revenue, Of the agreements with a fixed incentive fee,the most common are reservation, room night, or a combination of all three. 7%, 8% or 10% of GOP.Of the agreements with a sliding scale, the most popular is 5-10% of GOP. While the majority of management agreements do not specify a separate contribution for loyalty programs, 32.1% of our sample Not surprisingly, in contrast to the base fee scenario, incentive fees include a fee which ranges from 2-5% of the materialised revenue. are generally higher for 4 and 5 star hotels than 3 star hotels. 6. Operator Guarantee Incentive Fee (% GOP) – Asia Pacific In the Asia Pacific sample, 28.6% of agreements contain performance guarantees by the operator, which is roughly the Sliding Scale same proportion revealed in the 2001 survey. In these cases, the 8 operator agrees to a minimum GOP either in terms of a percentage of Gross Revenue or a fixed sum in local currency. Of the 6 agreements with operator guarantees, 50.0% are for the full term of the contract.

4 7. Performance Most agreements contain a clause requiring that the hotel is 2 operated to the standard of a particular star rating, relevant brand Number of Agreements standards, relative to a competitive set or based on the annual budget. 0 Nil 5% 7% 8% 9% The trend towards owners requiring operators to meet minimum 10% 12% 15% 5.9% Other performance standards has increased since the previous survey.In %GOP our most recent survey, 57.1% of Asia Pacific management from 0-10% from 0-15% from 5-10% agreements contain such clauses, the most common of which Source: Jones Lang LaSalle Hotels; Baker & McKenzie specifies achieving 80% of budgeted GOP.Owners may terminate the agreement if operators fail to achieve this for two consecutive years. In most cases, operators can pay the difference between the budget and actual amount. However, in some agreements this is only permitted once during the term. Other minimum performance clauses specify the hotel must achieve a certain RevPAR relative to the competitive set,market,or even a particular property, which is often a hotel managed by the same hotel operator.

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Global Hotel Management Agreement Trends

8. Budget 9. Restrictions on Operator a) Annual Budget a) Appointment of Key Personnel

Consistent with our 2001 survey,the annual budget continues to be In most instances, if the owner’s consent is required in relation to used as a key control mechanism by owners.Owner approval of the personnel, it is in respect of the General Manager and in some annual budget is required in 85.7% of management agreements.In instances the Financial Controller.Beyond these appointments,the most instances the operator is required to submit the annual operator generally has free reign. Whilst there has been a slight budget to the owner 30-60 days prior to the commencement of the decline in the proportion of agreements requiring consent, owner next financial year and the owner is allowed between 10-60 days to consent continues to be the norm. Where specified, the level of respond. The budget is typically considered to be approved if the owner involvement is as follows: owner fails to raise any objections within the specified time frame. Involvement of Owner % of Agreements b) Budget Dispute Resolution 2005 2001 Survey Survey In the event that a dispute relating to the budget arises, the most common procedure continues to be implementing the agreed Owner consent required 71.4% 80.4% terms of the budget, and then attempting to resolve the disputed Owner permitted to comment 17.9% 2.2% items. Where disputes are unable to be resolved within an agreed No approval required 10.7% 17.4% timeframe (usually 14 days),our 2005 survey found that resolution of disputes by an independent third party whose decision is final b) Restriction on Contracting and binding continues to be the most popular mechanism with 64.3% of the agreements containing this type of mechanism. Our 2005 survey reveals a relaxation in owners’ control of operators’ contracting practices. Since the last survey, the Interestingly, whilst independent expert determination continues proportion of contracts where no owner approval is required has to be the most popular mechanism there has been an increasing nearly doubled from 17.8% to 32.0%. Where approval is required use of arbitration, which is a more formal dispute resolution this is increasingly by reference to a monetary limit (eg $20,000 procedure. There has also been an increase in the proportion of and above) and/or the term of the relevant contract (eg one year agreements which do not have any formal dispute resolution and above). Where specified, the restrictions are as follows: procedure (increasing from 7.0% to 14.3%). The breakdown of the results is as follows: Restrictions on Operator % of Agreements

Method % of Agreements 2005 2001 Survey Survey 2005 2001 Survey Survey Owner consent required for all contracts 0.0% 13.3% Arbitration 17.9% 9.3% Monetary limit and/or contract restrictions 64.0% 57.8% Independent Expert 46.4% 55.8% Other restrictions 4.0% 11.1% Dispute Resolution 0.0% 9.3% No approval required 32.0% 17.8% Private negotiation 7.1% 9.3% Owner takes precedence 3.6% 2.3% c) Restriction on Granting of Leases and Other 10.7% 7.0% Concessions Mechanism 14.3% 7.0% The proportion of agreements which require that owner consent be obtained for the granting of leases and concessions appears to be static between our 2001 and 2005 surveys. Where approval is required it appears increasingly to be required in relation to all leases and concessions rather than being applied above a monetary limit or for a term longer than a specified minimum. Where specified, the restrictions are as follows:

Restrictions on Operator % of Agreements 2005 2001 Survey Survey Owner consent required for all contracts 45.8% 28.3% Monetary limit and/or contract restrictions 29.2% 39.1% Other restrictions 0.0% 4.3% No approval required 25.0% 28.3%

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10. Capital Expenditure Termination Clauses – Asia Pacific a) Extent of Owner's Obligation 100 %

Consistent with the position in 2001, most agreements impose an 80 % obligation upon owners to provide sufficient capital expenditure to maintain the hotel at its specified standard, particularly in relation 60 % to 5 star hotels. Otherwise, capital expenditure is usually at the owner's discretion. 40 % b) FF&E Fund 20% Almost all agreements reviewed impose an obligation upon the owner to allocate a specified percentage of Gross Revenue to FF&E. 0 % As was the case in 2001, the most common allocation is 3% (with Termination Without Cause Termination On Sale some agreements having a ramp up in the early years). The trend

continues (particularly in Australia) for the FF&E allocation to be No termination right Termination available an accounting entry in the owner's books rather than an actual cash fund. Termination with no fee payable

Source: Jones Lang LaSalle Hotels; Baker & McKenzie FF&E Reserve (% of Gross Revenue) – Asia Pacific

10 12. Non-Compete Most agreements (67.9%) contain a geographic restriction, with 8 the majority of these restrictions applying for the term of the agreement.This represents an increase from 58.0% in the previous 6 survey and is perhaps indicative of the dominance of international operators with multiple properties. 4 Restriction % of Agreements

Number of Agreements Number of 2 2005 2001 Survey Survey 0 Geographical restriction for initial 1 – 5 yrs 17.9% 4.0% Nil 2% 3% 4% Geographical restriction for 6- 10 yrs 3.6% 2.0% 2.5% 2-4% 1-3% 1-5% 0.5-3% 1-1.5%

Flat fee Geographical restriction for term of contract 46.4% 50.0% 1.5-5.5% % of Gross Revenue Geographical restriction for 1 – 5 yrs after termination 0.0% 2.0% Source: Jones Lang LaSalle Hotels; Baker & McKenzie No geographical restriction 32.1% 42.0%

11. Termination 13. Dispute resolution a) Termination Without Cause As the table below indicates,all agreements surveyed contain some form of alternate dispute resolution.A binding determination of an Things have not changed significantly since 2001. The proportion independent expert is typically used to resolve budget disputes of agreements containing a provision which allows the owner to with a range of approaches taken for other kinds of disputes. In terminate the agreement without cause is 25.0% in 2005, comparison to 2001, there has been a significant decrease in court compared to 36.0% in 2001. Of these agreements, all provided for action as a means of resolving disputes. the payment of compensation to the operator. As was the case in 2001, the higher the star rating, the less likely there will be a Form of Resolution % of Agreements termination without cause provision. In 72.0% of the five star agreements reviewed, there is no such clause. 2005 2001 Survey Survey b) Termination on Sale Independent Expert 32.0% 34.0% Arbitration 40.0% 26.0% Since 2001,the availability of vacant possession has increased.The Independent Expert and Arbitration 24.0% 20.0% proportion of agreements with a termination on sale clause has Independent Expert and Court 4.0% 2.0% grown from 52.0% in 2001 to 82.1% in 2005. As revealed in 2001, almost all agreements with such a provision also provide for the Independent Expert,Arbitration and/or Court 0.0% 6.0% payment of a termination fee to the operator. Court 0.0% 12.0%

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EUROPEAN MANAGEMENT AGREEMENTS Term Renewals - Europe 3.4% Written in conjunction with CMS Cameron McKenna LLP 13.8% Our survey reviewed management contracts agreed since 2001,the year of our previous survey.In total we reviewed contracts covering 29 hotels and 5,912 rooms in 11 countries across Eastern, Central and Western Europe. 51.7% 24.1% Although operator guarantees appear to have become less common, European agreements have, on the whole, become more owner-friendly over the past few years as more international operators chase the same scarce prime sites in European city 3.4% centres. We expect this trend to continue. 3.4%

1. Term Nil 1 yr 3 yr Multiple of 5 yrs Initial contract terms in Europe have reduced over the last four Multiple of 10 yrs Multiple of 20 yrs years.The majority of contracts show a shorter initial term,with the average term down four years from 19 in 2001 to 15 years in 2005. Source: Jones Lang LaSalle Hotels; CMS Cameron McKenna As in 2001, the single largest segment is the 20 to 29 years group, 3. Base Fee which in the majority tends to be 20 years. However this segment When compared to the previous survey, a slightly higher has shrunk significantly from 51.7% in 2001 to 34.5% today. proportion of management contracts provide for a fixed base fee, If compared to the 2001 survey, a rapidly increasing proportion of sliding scales or a mixed percentage. contracts (58.6% in 2005 versus 37.9% in 2001) have an initial However, while the 2001 survey found a fairly even spread for each term shorter than 20 years. If this trend continues, it will bring Europe more in line with both Asia Pacific and the Americas and of the categories in the 0-5% range, today we see a strong should increase owners’ flexibility. preference for the 3-3.9% category, with 34.5% of the sample falling into this range. Almost a quarter (24.1%) of agreements Initial Term – Europe have a lower base fee, while only 6.9% of contracts have a base fee of 4% or more. 6.9% 6.9% 6.9% On the whole, the average base fee has increased marginally from 17.2% 1.8% in 2001 to 2.2% in 2005. We should note that the contractual relationship between owner and operator is increasingly governed not only by the traditional management agreement but also by parallel agreements such as Licence,Royalty or Service Agreements. 27.6% To fully assess the value of the payments due to the operator, it is 13.8% therefore necessary to look at the fee requirement of these parallel contracts. For the purpose of the graph below we have considered the accumulated base fees due under the various agreements. 20.7% Base Fee (% of Gross Revenue) – Europe 0-4 yrs 5-9 yrs 10-14 yrs 15-19 yrs 3.6% 3.6% 20-24 yrs 25-29 yrs 30-49 yrs 14.3% Source: Jones Lang LaSalle Hotels; CMS Cameron McKenna 35.7%

2. Option Period / Renewal Term Consistent with the shorter initial terms,agreements that are silent on renewals or require mutual consent have increased since 2001 to now account for more than half of the total surveyed. 7.1% 35.7% This result, if considered with the shortened initial terms highlights a trend that overall provides owners with increased flexibility or at least shorter-term commitment to one operator. At Nil 1-1.9% 2-2.9% the same time, operators are moving into less established markets in Central and Eastern Europe and might like the opportunity to 3-3.9% 4-4.9% Scaled/Mixed/Fixed walk away from a property if the market proves disappointing.

Of those agreements that do specify renewal terms, the most Source: Jones Lang LaSalle Hotels; CMS Cameron McKenna common increment is a multiple of five years.

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4. Incentive Fee 6. Operator Guarantee A wide range of incentive fee levels are apparent in European A mechanism for sharing risk is for the operator to guarantee management agreements.The most common (27.6%) incentive fee minimum levels of profit or a certain percentage return on the involves some form of profit share and the next single most owner’s investment, requiring the operator to fund any shortfall. popular (20.7%) fee is 10% of Adjusted Gross Operating Profit (AGOP). This survey shows a marked trend away from guarantees, which are present in only 20.0% of the sample, compared to 44.8% in However, it is becoming more usual to see incentive fees calculated 2001. The decline in guarantees is due to a number of factors based on a sliding scale,as seen in 65.5% of the contracts surveyed. including: These mechanisms mean that the more profitable a hotel (either in absolute terms or as a percentage of revenue), the higher the • As a result of the events on 11 September 2001, operators percentage of profit the operator can earn as its fee. The idea restricted their guarantees from applying to factors outside behind this concept is to align the owner and operator interests by their control. Now, many owners question the value of a rewarding the operator for excellent performance. However, if the guarantee, which does not pay out in the very circumstance in performance does not exceed expectations, incentives will be which they need them most. limited. • The Enron scandal has made listed hotel groups more cautious In the event of a profit share, the agreements stipulate either: about signing up for contingent liabilities. •NOP thresholds; • Most guarantees are now structured like loans, with the • Owner’s priority return deducted from GOP; or operator entitled to “claw back” guarantee payments out of surplus profits in future years, sometimes with interest. This •GOP targets. has led many owners to reassess the value of guarantees. Rather than a contingent loan in the future, owners would Sliding scale fees depend on the number of years of operation often prefer a loan or key money up front to help pay for the and/or certain profit targets. hotel’s construction.

Incentive Fee (% of GOP) – Europe • In exchange for a guarantee, operators generally require Sliding Scale tougher provisions elsewhere in the management agreement often including higher fees. Owners feel it is better to negotiate 10 benefits such as lower fees elsewhere in the contract than have an operator guarantee. 8 A common provision is the deferral or subordination of the 6 operator’s incentive fee, so that it is not payable until a certain level of profit is achieved. This is more meaningful than the equivalent 4 threshold for guarantees since operators have not restricted the cause of failure to circumstances within their control. Number of Agreements Number of 2 Operators have traditionally favoured management contracts as a 0 way of earning an income stream without taking on the risks and liabilities of ownership. However, several owners (and particularly Nil 8% 10% 12% 7.5% their lenders) increasingly look to operators to share in the risk by means of equity contributions, loans or guarantees. from 5-10% from 5-15% from 5-50% from 0-15% from 0-10% Profit Share

% of GOP Many owners think that an equity investment or loan by the

Other Sliding Scales operator will align their interests more closely and make the operator think more like an owner. However, this does not always Source: Jones Lang LaSalle Hotels; CMS Cameron McKenna happen in practice because several operators are concerned primarily with their management fees - they often look at sliver 5. Other Fees and Charges equity as the cost of acquiring a management contract rather than A surprising 58.6% of contracts do not specify the level of such as an investment in its own right, immediately writing down the charges. These fees and charges may be included in side cost. Giving the operator equity also complicates decision making agreements that were not available to survey. (with complicated rules dictating when the operator is allowed to vote on the owner’s actions) and often introduces complex Half (50.0%) the contracts that deal with Sales & Marketing mechanisms governing the transfer of shares, such as “tag along” Charges do so as a percentage of Gross Revenue (1-3%) with the and “drag along” rights. most common being 1% of Gross Revenue. 37.5% use Rooms Revenue as a basis for calculation and nearly all of these agreements specify 2% of Rooms Revenue.

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7. Performance Where specified, the level of owner involvement is as follows:

More than half the sample included a performance clause,which is Involvement of Owner % of Agreements similar to the 2001 result. Typically, non-performance is considered an underachievement over two consecutive years. An 2005 2001 Survey Survey underachievement can be defined in different ways.More common definitions include the failure to achieve either a RevPAR above the Owner consent required 95.2% 75.0% average of the competitive set or a profit above a set percentage of Owner permitted to comment 0.0% 12.5% the budgeted profit (most commonly 80% of GOP). However, as No approval required 4.8% 12.5% with guarantees,operators tend to escape liability if they can prove that the failure is due to circumstances beyond their control. b) Restrictions on Contracting 8. Budget More than two thirds of the contracts provide a monetary limit in a) Annual Operating Budget terms of the liability incurred and / or a limit in terms of the length of contract or its termination period. Typically such time limits It is now standard for the owner to approve the operating budget would be that the term of contract is not to exceed 12 months or (89.7%) and in most cases also the capital expenditure budget.The that it can be terminated with a three-month termination period. operator typically needs to be informed of any objections within a Indicative of owners’ growing trend to exert more control over the specified time,ranging from 20 to 90 days.Otherwise the budget is operator and the liabilities they incur, the proportion of deemed to be agreed. agreements that allow operators a free reign with contracting has b) Budget Dispute Resolution decreased further from 28.6% in 2001 to 17.4% in 2005.

Generally, if no agreement on the budget can be reached, the Where specified, the restrictions are as follows: previous year’s budget will continue to form the basis for the operation. However, in practice, budget disputes will usually be Restrictions on Operator % of Agreements resolved by private negotiation. 2005 2001 Survey Survey Form of Resolution % of Agreements Owner consent required for all contracts 13.0% 0.0% 2005 2001 Monetary limit and/or contract restrictions 69.6% 57.1% Survey Survey Other restrictions 0.0% 14.3% Arbitration 17.9% 18.5% No approval required 17.4% 28.6% Independent Expert 57.0% 37.1% Private Negotiation 3.6% 7.4% c) Restriction on Granting of Lease & Concessions Owner Takes Precedence 3.6% n/a No Mechanism 17.9% 11.1% Owners tend to exert more control over operators’ granting of leases and concession than they do on operators entering into contracts. Two thirds of the sample require owner approval for all 9. Restrictions on Operator cases (up from 50.0% in 2001), while an additional 19.0% require a) Appointment of Key Personnel it for material contracts, similar to those described in section 9.b above.Only in 14.3% of cases no owner approval is required.Again Three quarters of agreements stipulate the owner must approve this is a smaller proportion than in 2001. Where specified, the the operator’s choice of key personnel. In some cases, the owner restrictions are as follows: can decline up to three candidates. In nearly half these contracts (45.0%), the approval right goes beyond just the General Manager Restrictions on Operator % of Agreements to include the director of Financial Controller and the Director of Sales.Occasionally the owner must also approve other members of 2005 2001 the executive team. Survey Survey Owner consent required for all contracts 66.7% 50.0% Monetary limit and/or contract restrictions 19.0% 26.9% Other restrictions 0.0% 7.7% No approval required 14.3% 15.4%

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b) Restrictions on Incurring Expenses Outside the FF&E Reserve - Europe Approved Budget 10 Regulation of this area of operators' authority is less stringent. Generally, the operator is expected to make reasonable endeavours 8 to keep within close parameters of the budget or if a material deviation of the operating budget is anticipated, the operator will 6 need to inform the owner. 4 Where specified, the restrictions are as follows:

Number of Agreements Number of 2 Restrictions on Operator % of Agreements 2005 2001 0 Survey Survey Nil 3% 4% 5% 1-4% 2-5% 1-3% 2-4% Owner consent required at all times 27.2% 13.6% 3-5% Operator may only exceed by a fixed percentage 27.3% 18.2% % of Gross Revenue Operator must inform Owner immediately after exceeding 0.0% 4.5% Source: Jones Lang LaSalle Hotels; CMS Cameron McKenna Operator must obtain prior approval for litigation-based expenses 0.0% 4.5% 11. Termination Operator can only exceed without approval a) Termination without Cause in emergencies 0.0% 18.2% Other restrictions 0.0% 31.8% Only a minority of contracts (17.2%) in the 2005 sample allow for No approval required 45.5% 9.1% a termination without cause. This is nearly half as few as seen in 2001 (31.0%). In those cases that allow such a termination, a cancellation fee, which is typically an average of the fees over a 10. Capital Expenditure specified period prior to termination, is due to the operator. With a) Extent of Owner’s Obligation new hotels, any termination of the management agreement tends only to be possible after an initial specified period of several years. In general,the owner must provide adequate funds to maintain the hotel in accordance with agreed standards.At times the owner may b) Termination on Sale be required to meet changes in the operator’s standards as far as this is reasonable. The test of reasonableness is important to avoid There are now more agreements (55.2%) that allow for a the owner providing a “blank cheque” to the operator. termination on sale than we saw in 2001 (41.4%). Again this highlights the owners’ desire for more flexibility. As a rule, the b) FF&E Reserve market places a higher value on a hotel offered with vacant possession than one encumbered by a management agreement. In our 2001 survey, 27.6% of contracts did not include an FF&E Given the increased competition between operators’ to expand Reserve. This has changed significantly with this year’s results, across Europe, it is likely that they will have to concede this point where only 3.4% do not provide for an FF&E Reserve.It can now be more often and forsake long-term security of their cash flows. said that an FF&E Reserve is the norm for management agreements across Europe. In many cases,termination on sale is possible only after a specified number of years, while the compensation fees payable reduces as More than half of the agreements set out a range that increases by the term progresses. Frequently, a termination period of several one percentage point for every year of operation over the first three months must be observed. to five years of a newly opened hotel.

Generally, from Year Five onwards, the FF&E Reserve is between 3-5% of Gross Revenue. Overall, the level of FF&E Reserve appears to have increased since the 2001 survey. The proportion of agreements specifying an amount equal to 4.0% or more of Gross Revenue in the stabilised year has increased from 48.3% in 2001 to 65.5% in 2005.

This reflects the experience of both owners and operators that historic levels of FF&E Reserve have proved insufficient to maintain hotels to their required standard. Arguably even at 5.0% it is likely that additional owners’ capital expenditure will be required occasionally,but it is unlikely that owners will want to tie up more money in a Reserve account they don’t directly control.

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Termination Clauses – Europe 13. Dispute Resolution 100% More than a third of the agreements determine the independent expert as the sole mechanism of alternative dispute resolution or at 80% least as the first step after the collapse of good faith discussions between owner and operator. Although nearly two thirds of 60% contracts specify arbitration as the agreed route to follow, none expressly refer disputes to a court. A quarter of contracts provide 40% for arbitration proceedings if the independent expert procedure has not provided a common agreement.

20% Form of Resolution % of Agreements 0% 2005 2001 Termination Without Cause Termination On Sale Survey Survey Independent Expert 11.1% 7.4% No termination right Operator Consent Arbitration 63.0% 29.6% Required Independent Expert and Arbitration 25.9% 37.0% Termination with Termination with no fee payable fee payable Independent Expert and Court 0.0% 3.7%

Source: Jones Lang LaSalle Hotels; CMS Cameron McKenna Independent Expert,Arbitration and/or Court 0.0% 14.8% Court 0.0% 3.7% 12. Non-Compete Only 37.5% of the 2005 sample of management agreements set out 14. Governing Law non-compete clauses for either the whole or part of the term of the Interestingly, approximately a third of the contracts reviewed agreement. This is a decrease from the 2001 result where 48.3% of specify a governing law which is different to the local law.Given the contracts provided such a restriction. multitude of jurisdictions across Europe and the strong cross border activity of investors, one likely explanation is that with Over half of the contracts that provide a restriction, do so for the neither owner nor operator being domestic to the market the hotel whole term of the contract, although such restriction is generally is situated in, they chose a governing law that is more familiar. linked only to the particular brand rather than the family of brands However,depending on the issues in dispute,the choice of a foreign run by an operator. governing law may not avoid the need for local law advice.

Agreements that specify a non-compete clause over a shorter time frame consider same brand competition in the early years as particularly harmful, as the subject hotel will not have established itself in the market. However, even a well established hotel may be adversely impacted by the entrance of a brand new hotel. There is therefore a strong case for including a non-compete term concurrent with the term of the agreement.

Restriction % of Agreements 2005 2001 Survey Survey Geographical restriction for initial 1 – 5 yrs 8.3% 3.4% Geographical restriction for 6- 10 yrs 8.3% 3.4% Geographical restriction for term of contract 20.9% 41.4% Geographical restriction for 1 – 5 yrs after termination 0.0% 0.0% No geographical restriction 62.5% 51.7%

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EUROPEAN LEASE AGREEMENTS European Lease Features As leases are particularly popular in Europe, we have included a Written in conjunction with CMS Cameron McKenna LLP separate analysis of European hotel lease agreements to complement the global management agreement survey. We have Lease Agreements versus Management analysed 36 contracts covering 8,264 hotel rooms in six countries. Agreements Across Europe, hotel lease agreements are more consistent than 1. Country other commercial lease agreements. The reasons for this Our survey included contracts from six countries that represent homogeneity are twofold. some of the major European hotel markets. The sample of agreements is as follows: Firstly, hotel operators have specific requirements unique to hotels and different to the requirements of an occupier of commercial Lease Agreement Surveyed by Country property. For instance, hotel operators generally seek a longer lease

period than the average term for commercial property. Secondly, 2.8% the large number of cross-border transactions has led to more 2.8% standardised forms of legal documentation. 30.6%

It is noticeable that in certain jurisdictions, there is an obvious 25.0% preference to use management agreements in place of leases and vice versa. These preferences may not be solely the result of local practice. In general terms a management agreement may be advantageous from an operator’s perspective as there is less risk to 5.6% the operator while ownership of the business is retained by the hotel owner.As a lease confers a proprietary interest, it will impose 33.3% upon the operator greater obligations than would be found in a management agreement in relation to the land and its buildings. UK France Spain

An obvious example is the obligation to repair (and a liability for Germany Italy Switzerland dilapidations), albeit that for a number of jurisdictions this obligation is subject to legislative limitations. However, the Source: Jones Lang LaSalle Hotels; CMS Cameron McKenna downside of a management agreement is that there is likely to be less protection for the operator once the arrangement comes to an 2. Term end. There may also be technical reasons favouring one over the Across the sample, the most common length of term (41.7%) falls other. For example the predominance of using management between 11 and 20 years. French leases commonly show a term of agreements in no doubt results from the restrictions 12 years, while German and UK leases terms generally fall in the preventing the granting of a najem (lease) for a period of more 21-30 year range. Typically, German terms tend to be either 20 or than 10 years. The tax treatment of the agreement is likely to be a 25 years, while only the UK shows terms in excess of 30 years. strong motivator. Take the UK, for example: Stamp Duty Land Tax is payable on a lease but is not payable on a management Term – European Lease Agreements agreement. Additionally, recent accounting changes in the UK mean that with a lease,future rental burdens must be shown as 2.8% 8.3% liabilities on the operator’s balance sheet. 13.9% In all jurisdictions there are a number of legislative restraints (and in the UK common law rules too) restricting what can and cannot be included as terms of a lease agreement. For example, it is generally not possible to include in a lease agreement a provision for determining disputes at a forum or under a choice of law other than the jurisdiction in which the hotel is situated while in a 33.3% 41.7% management agreement the parties can agree on a governing law.

In all jurisdictions, to become a lease the agreement will need to satisfy a number of technical requirements. Simply calling the Less than 11 to 20 21 to 30 document a lease does not create a lease agreement. Similarly, a 10 years years years recent decision of the English Courts found that an agreement 31 years Not stated dressed up as a “management contract”may be a lease if it satisfies and longer the technical requirements for a lease. Although that case did not Source: Jones Lang LaSalle Hotels; CMS Cameron McKenna break any new ground, it reinforces the lesson that care should be taken to ensure that the agreement has whatever status the parties intend.

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3. Rent 5. Indexation / Uplifts Given the wide range of quality and location of the hotels in the In order to protect the value of the income stream to the owner / sample, it is not feasible or meaningful to analyse rent in detail. landlord, nearly 80.0% of leases surveyed provide an indexation However, on the basis of the total sample, rent per room ranges clause or pre-agreed rent step ups as a tool to mitigate the effect of from less than €3,000 per annum to more than €50,000 per inflation on the rental income. annum, with an average of about €13,000 per room per annum. 36.1% of contracts use 100% of the nominated index for annual uplifts of the rent. The second most popular arrangement (16.7%) 4. Type of Rent is a set of pre-agreed step-ups in the rental amount due.This tends Interestingly, the survey shows that fixed rents appear to be on the not to be on an annual basis, but at agreed points in time. 5.6% of way out, with less than a third (30.6%) of contracts (30.3%) contracts do not look for an annual increase as a proportion of the stipulating rent in this way. index movement, but will look at certain thresholds in the index to be achieved before the rent will be increased by a proportion of The dominant arrangement (63.8%) is a semi-variable structure, that index movement. where the operator pays a relatively lower fixed rent, which is complemented by a performance linked variable ‘top slice’. This Indexation – European Lease Agreements ‘top slice’ can either be a percentage of Gross Revenues or of an agreed level of profit. 5.6% 2.8% 22.2% Such a rental structure requires the operator / tenant to share 8.3% operational and financial information with the owner / landlord, allowing them to verify the rental calculation and comment on the 8.3% performance. It also forces the owner / landlord actively to asset manage the operation, as part of their income is directly linked to the performance of the hotel. 16.7%

Obviously, the further down on the profit and loss account (P&L) 36.1% the basis for the variable rental element is set, the more influence the owner / landlord is likely to require in order to protect their Fixed % of Index once agreed step up of Index achieved income. Base Rate 0-74% 75-84% Index of Index of Index Only a small proportion (5.6%) of leases include a fully variable movement pa movement pa lease arrangement as this exposes the investor to the full 100% of Index Pre-agreed n/a operational risk without allowing them the same influence as or equivalent pa step ups under a management agreement. However, the operator / tenant benefits from the fact that such a lease will not show on the Source: Jones Lang LaSalle Hotels; CMS Cameron McKenna corporate balance sheet as a liability as would be the case with a fixed lease or the fixed element of a semi-variable lease.

Rent Type – European Lease Agreements

30.6%

5.6% 63.8%

Fixed plus All fixed All variable variable

Source: Jones Lang LaSalle Hotels; CMS Cameron McKenna

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6. Guarantee Arrangements The majority of contracts (58.3%) benefit from some form of guarantee arrangement. This not only reduces the risk for the owner / landlord of missing out on rental payments during the long term contract, but also further enhances the opportunity for them to source debt finance on favourable terms. However, it is important to understand the covenant of the guarantor. For instance,is it a single purpose vehicle with limited capitalisation or a corporate guarantee of the parent company?

Our survey found that of those contracts that provide a guarantee arrangement only 8.3% used a bank guarantee, while 75.0% have provided a corporate guarantee of some form.

Type of Guarantee – European Lease Agreements

16.7%

8.3%

75.0%

Corporate Bank Other Guarantee Guarantee

Source: Jones Lang LaSalle Hotels; CMS Cameron McKenna

7. Repairs and Maintenance There are differences in the typical arrangement for repairs and maintenance across different countries, however, 63.9% of the sample leave the responsibility for structural repairs with the owner / landlord, while repairs are the tenant’s responsibility.

A common approach in Germany is the “Dach & Fach” arrangement,which tends to leave the owner / landlord responsible for the roof and shell of the building and often, but not always, major repair or replacement requirements for significant plant and machinery and similar items.

Only 36.1% of contracts pass on all responsibility to the tenant. These are predominantly UK leases that provide for full repairs or full repairs and insurance arrangements.

8.Assignability The vast majority of contracts are assignable to affiliated tenant companies (88.9%). However, in several countries, such as Germany, lease trading is not possible as it is in the UK.

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SAMPLE SUMMARY Global Management Agreement Survey European Lease Survey Star Grade Five 38 11 Four 29 16 Three 7 7 Unknown / Various 6 2

Rooms Total Rooms* 46,088 8,264 Average Room Count 276 230

Brands ANA, Courtyard by Marriott, Crowne Plaza, Cerrutti, Club Med, Country Inns & Suites, De Vere,Dolce,Express by Holiday Inn,Four Courtyard by Marriott, Express by Holiday Inn, Seasons, Hilton, Ibis, JAL, Jury's Inn, Hilton,Ibis,Le Méridien,Lindner,Marriott, Kempinski, Le Meridien, Marriott, Mercure, NH, Pierre & Vacances, Radisson SAS, Regent, Millennium, NH Hoteles, Nikko, Novotel, Rocco Forte, Shangri-La, Paramount, Park Hyatt, Radisson, Radisson Edwardian, Radissan SAS, Raffles, Renaissance, Ritz Carlton, Robinson, St Regis, Sebel, Sheraton, Shangri-La, Sofitel,Westin

Countries Australia, , Czech Republic, Fiji, Germany, France,Germany,Italy,Spain,Switzerland,UK Hong Kong,Indonesia,Italy,Japan,, Netherlands, Poland, Portugal, Russia, Singapore, Spain, Switzerland, Thailand, Turkey, UK, US

* Americas sample includes management agreements for multiple properties which has elevated the number of rooms

GLOSSARY AGOP: Adjusted Gross Operating Profit. GOP less specified items Incentive Management Fee: A fee paid to the operator for their (eg Base Management Fee). services based on a percentage of Gross Operating Profit. Arbitration: Relates to the determination of disputes by an Independent Expert: Expert in the area determining a dispute – arbitrator using less technical rules than a court. usually a consultant from a leading accountancy or consulting firm with a hospitality division. Base Management Fee: A fee paid to the operator for their services, usually based on a percentage of Gross Revenue. Management Fee: Payment which generally comprises a base management fee and an incentive management fee. Budget: Comprises forecast revenue, operating expenses, GOP, management fees, results of operation, capital expenditure, NOP: Net Operating Profit,which is equal to Gross Operating Profit cashflow, payroll and staffing schedule and business / less incentive fees, property taxes, reserve, ground rental, owner’s marketing plan. costs and insurance. Capital Expenditure: Relates to structural changes of the Operating Costs: All costs of operating the hotel including group property,major remodeling,replacement ofexisting assets etc,in services, costs of any insurance claims, costs of preparing business order to maintain the hotel and/or improve the profitability or plans, costs of any advisors. extend the life of the asset. RevPAR: Revenue Per Available Room. The product of occupancy Court: Judicial determination. and average daily rate. FF&E: Furniture, Fixtures and Equipment – non structural Rooms Revenue: All revenue derived from the rooms department. improvements as distinct to Capital Expenditure. Shortfall: Difference between actual result and guarantee result. GOP: Gross Operating Profit equals Gross Operating Revenue less Term: Number of years from the commencement date to the Operating Costs. natural expiration of the term of the management agreement. Gross Revenue: All revenue and income, exclusive of certain expenses, such as taxes, derived directly or indirectly from the operation of the hotel, including licence, lease, and concession fees and rentals. 18 244161_JLL_HotelTopics 25/5/05 4:43 PM Page 19

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GLOBAL LEADERSHIP MANAGEMENT AGREEMENT EXPERTISE

Jones Lang LaSalle Hotels, the world’s leading hotel Over the past five years, Jones Lang LaSalle hotels has investment services group, provides clients with value- negotiated a significant number of management added investment opportunities and advice. In 2004, our agreements across the globe, placing us in an ideal position success story included the sale of 23,103 hotel rooms to the to identify current trends in market standards. Our diverse value of US$5.2 billion in 85 cities and advisory expertise client base ranging from local private investors to multi- on 132,498 rooms to the value of US$27.9 billion across national conglomerates, signifies the recognition of Jones 301 cities, including asset management of hotels worth Lang LaSalle Hotels’ expertise in this area. US$2.5 billion. CONTACTS GLOBAL OFFICE NETWORK For your convenience, provided below is a single point of Jones Lang LaSalle Hotels has 18 dedicated offices contact for any management agreement inquiry. worldwide. The geographic spread of these offices enables Americas: us to monitor the key real estate investment markets and Karen Johnson secure market intelligence for the benefit of our clients. Tel +1 213 680 7916 Our dedicated offices worldwide are listed on the back of [email protected] this publication. Asia Pacific TRUSTED ADVISOR David Gibson Tel +61 7 3231 1401 Our multi-disciplined approach ensures our clients benefit [email protected] from the combined skills of our specialists professionals in Europe: each of our service offerings: Ascan Kókai • Disposition and Acquisition; Tel: +44 20 7399 5617 •Valuation and Appraisal; [email protected] • Equity and Debt Sourcing; •Asset Management; www.joneslanglasallehotels.com •Operational Advice; •Strategic Consulting; •Asset Enhancement Services; • Industry Research.

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Global Hotel Management Agreement Trends

OUR FIRM LEADING LAWYERS FOR THE Baker & McKenzie has provided sophisticated legal advice and HOTEL INDUSTRY services to many of the world's most dynamic and global CMS Cameron McKenna LLP is a leading European law firm for the organisations for more than 50 years. hotel industry,with clients including many of the continent’s major hotel owners, operators and lenders. With a network of more than 3,200 locally qualified, internationally experienced lawyers in 69 offices in 38 countries, We advise on every aspect of the hotel industry, including we have the knowledge and resources to deliver the broad scope of acquisitions and disposals, construction, financing and quality legal services required to respond effectively to both operational issues, often with a cross-border element. We are part international and local needs – consistently, with confidence and of CMS, an association of 9 European law firms with 47 offices in with sensitivity for cultural, social and legal practice differences. 24 countries.

SPECIALIST HOTEL AND MANAGEMENT AGREEMENTS AND LEASES EXPERIENCE Our lawyers are acknowledged experts, including some with Baker & McKenzie has a long standing involvement with and experience of working within the hotel industry.They have advised commitment to the hotel, resort and tourism industry. Our global owners, operators and lenders on management agreements and Hotel Resort and Tourism Group has over 150 lawyers who are leases for more than 100 hotels across Europe.We have also created actively engaged on a day to day basis and very much interested a standard form of cross-border hotel lease which has already and involved in the tourism industry. Because a large number of successfully been used in Europe. the organisations involved in the industry and the transactions are multi-jurisdictional, Baker & McKenzie - through its extensive AWA R D S network of offices - has traditionally been retained by many of the The firm is top-ranked for hotel transactions by the UK’s major participants in the industry both locally and regionally. independent Legal 500 directory, which describes it as having “a We have undertaken detailed and diverse assignments for leading cross-departmental hotels group, praised by clients for developers, owners, operators, financiers and other prominent being very focused and responsive.” industry participants relating to a broad range of transactions including corporate mergers and acquisitions, asset sales and KEEP UP TO DATE acquisitions, management agreements, joint ventures, capital Our Hotel Group regularly sends out updates and briefing guides raising, debt financing and development and construction through Law-Now, our free email alert and online information contracts and operational issues. service. To register visit www.law-now.com - you will also have access to an archive of past hotel guides and articles through MANAGEMENT AGREEMENT EXPERIENCE www.law-now.com/hotels. A significant part of our global practice involves acting for owners, operators and financiers in regard to management agreements. CONTACTS Leases: James Miller We are at the leading edge of the development of the modern tel +44 20 7367 2442 management agreement that is continually evolving to address the [email protected] complex matrix of issues relevant to such agreements including the allocation of risk and the sharing of rewards between the Investments: Charles Romney owners and the operators. tel +44 20 7367 2727 CONTACT FOR MORE INFORMATION [email protected] Management Agreements: Daniel Braham If you require more information in regard to our experience and tel +44 20 7367 2857 capabilities and how we can assist you with management [email protected] agreements or generally in the tourism industry in Asia Pacific or anywhere else in the world please contact:

Graeme Dickson Partner +61 2 9225 0228 [email protected]

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Global Hotel Management Agreement Trends

Disclaimer: This report is confidential to the recipient of the report. No reference to the report or any part of it may be published in any document, statement or circular or in any communication with third parties without the prior written consent of Jones Lang LaSalle Hotels, including specifically in relation to the form and context in which it will appear.We stress that forecasting is a problematical exercise which at best should be regarded as an indicative assessment of possibilities rather than absolute certainties. The process of making forward projections involves assumptions in respect of a considerable number of variables which are acutely sensitive to changing conditions,variations in any one of which may significantly affect the outcome and we draw your attention to this factor. Jones Lang LaSalle Hotels makes no representation,warranty,assurance or guarantee with respect to any material with which this report may be issued and this report should not be taken as an endorsement of or recommendation on any participation by any intending investor or any other party in any transaction whatsoever. This report has been produced solely as a general guide and does not constitute advice. Users should not rely on this report and must make their own enquiries to verify and satisfy themselves of all aspects of information set out in the report. We have used and relied upon information from sources generally regarded as authoritative and reputable, but the information obtained from these sources may not have been independently verified by Jones Lang LaSalle Hotels.Whilst the material contained in the report has been prepared in good faith and with due care, no representation or warranty is made in relation to the accuracy, currency, completeness, suitability or otherwise of the whole or any part of the report. Jones Lang LaSalle Hotels, its officers, employees, subcontractors and agents shall not beliable (to the extent permitted by law) to any person for any loss, liability, damage or expense (“liability”) arising directly or indirectly from or connected in any way with any use of or reliance on this report. If any liability is established, notwithstanding this exclusion, it shall not exceed $1,000.

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Dedicated Offices

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